1. The assessee's appeal is directed against the Commissioner's order under Section 263 of the Income-tax Act, 1961 ('the Act'), setting aside the ITO's order of assessment for the assessment year 1976-77.
2. The Commissioner on scrutiny of the ITO's record found that the ITO in computing the income for the assessment year under appeal allowed deduction under Section 36(1)(iv) of the Act, the amount contributed by the assessee to a trust called "The West Bengal State Electricity Board Employees' Provident Fund" even though the fund was not a 'recognised fund'. The Commissioner was of the opinion that the employees' provident fund having been exempted in terms of Section 17 of the Employees' Provident Funds and Family Pension Fund Act, 1952 ('the EPF Act') the fund ceased to be a recognised provident fund within the meaning of Section 2(38) of the Act. The Commissioner in this connection relying on a circular issued by the CBDT-Circular No. 153, dated 30-11-1974-[1975] 98 ITR (St.) 37 held that the fund could not be considered to be one established under the EPF Act and, consequently, the ITO was wrong in allowing deduction in respect of the contributions made by the assessee towards the West Bengal State Electricity Board Employees' Provident Fund under Section 36(1)(iv). According to the Commissioner, in order to claim deduction under Section 36(1)(iv) the assessee must get the fund approved under the Fourth Schedule of the Act. The Commissioner observed that the assessee's application for approval of the fund under the Fourth Schedule was pending with the Commissioner's office and in completing the fresh assessment the ITO should enquire the outcome of the assessee's application for approval of its provident fund.
3. Before us the assessee's learned senior counsel, Dr. Pal, contended that the Employees' Provident Fund of the assessee was established under the West Bengal State Electricity Board Employees' Contributory Provident Fund Regulations, 1965, by a resolution No. 14 of the Board dated 28-9-1965. Our attention was drawn to the said resolution which reads as under : As the provisions of the Employees' Provident Funds Act, 1952 apply to the Board as a whole, the regulations, as whole, have now been redrafted in consultation with and with the prior concurrence of the Regional Provident Fund Commissioner, West Bengal, in conformity with the provisions of the aforesaid Act.
It has been further pointed out that the Regional Provident Fund Commissioner granted approval to the Provident Fund Rules framed by the assessee-company in his letter dated 12-10-1965. It has been stated that the Central Government by Gazette Notification dated 4-7-1956 ordered inclusion of electricity industry including the generation, transmission and distribution thereof in Schedule I of Section 4 of the EPF Act. The assessee requested the Regional Provident Fund Commissioner by a letter, dated 30-9-1965, for voluntary coverage of its provident fund scheme in. accordance with the provisions contained in the EPF Act as also for granting of exemption under Section 17 of the said Act. The assessee, it has been argued, established a provident fund scheme and a fund in accordance with Section 5 of the EPF Act. The Provident Fund Regulations, 1965, drawn up by the assessee was in accordance with the provident fund scheme in conformity with Section 5 of the EPF Act. Accordingly, he pointed out that the employees' provident fund of the assessee was a recognised provident fund and satisfied the conditions laid down in Section 2(38). It has been explained that the exemption granted by the State Government under Section 17 of the EPF Act, as per notification dated 8-5-1971, would not debar the assessee from claiming deduction in respect of the contributions made by it to the said 'recognised' provident fund. Even though the fund was exempted under Section 17, the said fund nonetheless was one established under the EPF Act and as such the fund should be treated as a recognised provident fund for the purpose of Section 2(38). In regard to the Commissioner's reliance on the Board's Circular, it has been argued that the power of revision conferred by Section 263 was not administrative but quasi-judicial in nature. In exercise of that power the Commissioner must have an unbiased mind in considering impartially the objection raised by the aggrieved party and in deciding the dispute according to the procedure consistent with the principles of natural justice. He could not permit his judgment to be influenced by certain instructions contained in a circular of the Board. In this connection reliance has been placed on a Calcutta High Court decision in the case of CIT v. Swedish East Asia Co. Ltd. [1981] 127 ITR 148. According to the learned senior counsel, the Commissioner should have held that on a true and correct interpretation of Section 2(38) the fund established by the assessee satisfied the test of a recognised provident fund. One alternative argument advanced by the learned senior counsel was that even if the fund was considered to be a non-recognised one, the contributions made by the assessee towards that fund were eligible for deduction in terms of Section 37 of the Act on grounds of commercial expediency. For this proposition he relied on the two High Courts' decisions in the cases of Addl. CIT v. Karnataka State Warehousing Corporation [1980] 125 ITR 136 (Kar.) and CIT v. Chhotabhai Jethabhai Patel Tobacco Products Co. Ltd. [1981] 128 ITR 702 (Guj.).
The departmental representative, on the other hand, strongly supported the Commissioner's order by making pointed reference to the Commissioner's observations that the fund has not been transferred to any trustees under the administrative control of the Employees' Provident Fund Commissioner but have only been exempted under Section 17. It has been further stated that the Board of Trustees was for the first time constituted on 16-9-1972 and since the fund was not approved by the Commissioner in accordance with the rules contained in Part A of the Fourth Schedule, the contributions made by the assessee towards the fund were not eligible for deduction under Section 36(1)(iv). In regard to the alternative argument advanced by the assessee's learned counsel, the departmental representative stated that Section 37 did not come into operation since the deductions claimed fell within the special provisions of Section 36(1)(iv). For this proposition he relied on a Madras High Court decision in the case of CIT v. Carborundum Universal Ltd. [1977] 110 ITR 621. In his counter reply Dr. Pal stated that the Commissioner was wrong in observing that the assessee admitted that the funds had not been transferred to any trustee under the administrative control of the Employees' Provident Fund Commissioner inasmuch as the fund was exempted under Section 17. In fact, according to the learned counsel, no such admission was made at any stage before the Commissioner. It has been stated that since the inception of the fund in 1965, it continued to remain under the administrative control of the Regional Provident Fund Commissioner. In this connection the learned counsel referred to the assessee's reply to the show-cause notice issued by the Commissioner under Section 263 wherein it was specifically mentioned in para 9 that- The Regional Provident Fund Commissioner, West Bengal has complete control over the Provident Fund of the Board, as will be clear from Regulationss 17 & 18 and the Board is obliged to pay him the administrative charges and inspection charges under the Employees' Provident Fund Act, 1952 in respect of the Board's Provident Fund.
4. We have considered the submissions of the rival parties and have carefully gone through the records of the case. The assessee's business consists in the generation, transmission and distribution of electricity. The Central Government by a notification dated 7-7-1956 directed in terms of Section 4 of the EPF Act that a provident fund scheme in respect of the employees of an electrical undertaking should be framed with effect from 31-7-1956. The assessee established a provident fund of its employees by drawing up a scheme in accordance with Section 5. The scheme known as the West Bengal State Electricity Board Employees' Contributory Provident Fund Regulations, 1965, which was approved and adopted in terms of resolution No. 14 of the Board dated 28-9-1965 and was duly approved by the Regional Commissioner of Provident Funds in terms of the Regional Commissioner's letter dated 24-10-1965. The manner in which the trust funds were to be invested may be found from Regulation 15 of the Employees' Contributory Provident Fund Regulations, 1965. Regulation 17 provides that in cases of any dispute arising between the trustees and the subscribers, the same shall be referred to the Regional Provident Fund Commissioner, whose decision shall be final binding on both the parties. Regulation 6 dealt with the functions and responsibilities of the trustees and their terms of appointment. Now Section 2(38) provides that a provident fund established under a scheme framed under the EPF Act would be a recognised provident fund. There can be no dispute, therefore, that the employees' contributory provident fund of the assessee was the scheme framed under the EPF Act. Such a provident fund satisfies the test of a recognised provident fund within the meaning of Section 2(38). Now we have to examine the impact of the exemption granted by the State Government under Section 17. Section 17(1) of the said Act reads as under : Power to exempt.-(7) The appropriate Government may, by notification in the Official Gazette and subject to such conditions as may be specified in the notification, exempt from the operation of all or any of the provisions of any Scheme - (a) any establishment to which this Act applies if, in the opinion of the appropriate Government, the rules of its provident fund with respect to the rates of contribution are not less favourable than those specified in Section 6 and the employees are also in enjoyment of other provident fund benefits which on the whole are not less favourable to the employees than the benefits provided under this Act or any Scheme in relation to the employees in any other establishment of a similar character ; or (b) any establishment if the employees of such establishment are in enjoyment of benefits in the nature of provident fund, pension or gratuity and the appropriate Government is of opinion that such benefits, separately or jointly, are on the whole not less favourable to such employees than the benefits provided under this Act or any scheme in relation to employees in any other establishment of a similar character.
The notification of the State Government No. 3952/3(0, dated 8-7-1971, granting exemption under Section 17(1) is extracted below. It is not necessary to extract the notification in its entirety which is quite lengthy. However, some of the important provisions contained in the notification are highlighted below : (1) The rule's of the provident fund of the establishment mentioned in Schedule I below (hereinafter referred to as the said establishment) with respect to the rates of contribution are not less favourable to the employees therein than those specified in Section 6 of the Employees' Provident Fund Act, 1952 (IX of 1952) ; and (2) The employees in the said establishment are also in enjoyment of other provident fund benefits which on the whole are not less favourable to them than the benefits provided under the Employees' Provident Funds Scheme, 1952 (hereinafter referred to as the said scheme), in relation to the employees in any other establishment of similar character.
NOW, THEREFORE, in exercise of the power conferred by Clause (a) of Sub-section (1) of Section 17 of the Employees' Provident Funds Act, 1952 (XIX of 1952), read with the Government of India, Ministry of Labour and Employment Notification No. SO 1236 dated the 20th June 1958 published in Part II, Section 3(z7) of the Gazette of India dated the 28th June, 1958 the Governor is pleased hereby to exempt, with effect from the date of publication of this notification in the Calcutta Gazette of said establishment from the operation of all the provisions of the said scheme, subject to the specific Schedule II below, namely :- 1. That the said establishment shall continue to have a provident fund in force the rules of which with respect of the rates of contribution shall not be less favourable than those specified in Section 6 of the Employees' Provident Funds Act, 1952 and employees shall also continue to be in enjoyment of other Provident Funds benefits which on the whole shall not be less favourable to the employees than the benefits provided under the Act or any Scheme in relation to the employees in any other establishment of a similar character and those rules shall be followed in all respects.
2. The employer in relation to the said establishment (hereinafter referred to as the 'Employer') shall within three months of the date of publication of this notification, amend the Constitution of the Provident Fund maintained in respect of the establishment hereinafter referred to as the fund, in regard to the following matters.
Para 3 of the said notification mentions, inter alia, that the rules of the fund shall not be amended except with the previous approval of the Regional Commissioner. Paras 4(a), 4(c) and 5 mention that the accounts of the fund are to be maintained in the manner directed by the Regional Commissioner to whom returns are to be submitted from time to time. It has been further provided that the employer shall furnish to the Regional Commissioner such accounts relating to the fund as the Central Commissioner may prescribe from time to time. All facilities for inspection of accounts of the fund by the Central Commissioner will have to be provided by the employer. Para 9 provides that- When the fund is wound up or exemption of the establishment is cancelled, accumulations standing to the credit of the employees, who, but for the exemption, would have been members of the Statutory Fund shall be transferred to that fund as soon as possible and in any case, not later than 30 days ..., after the date of cancellation of the exemption, together with a statement or statements as may be required by the Regional Commissioner.
Para 14 states that the inspection charges of the Regional Commissioner will be borne by the employer. On a perusal of the aforesaid notification of the State Government dated 8-7-1971, it is found that the assessee's contributory provident fund scheme drawn up in 1965 in accordance with Section 5 continued with certain amendments after the notification of the State Government granting exemption under Section 17(1) was issued. This is apparent from the registered trust deed executed on 16-9-1972 between the West Bengal State Electricity Board and the Board of Trustees of the Employees' Provident Fund inasmuch as it has been mentioned that the funds established under the West Bengal State Electricity Board Employees' Contributory Provident Fund Regulations, 1965 shall vest in and be administered by a Board of Trustees. It follows from the discussions made above that exemption granted by the State Government under Section 17(1) does not in any way take away the benefits that the employees were enjoying when the provident fund scheme was drawn in 1965.
5. We have now to examine the contents of the Board's Circular on which the Commissioner has placed reliance. The Board's Circular, dated 30-11-1974, reads as follows : Subject : Provident funds recognition under Section 3(1) of Part A of the Fourth Schedule to Income-tax Act, 1961-Provident fund exempt under Section 17(1) of the Employees' Provident Funds Act/Para 79 of EPF Scheme, 1952, or Para 27A of Employees' Provident Funds Scheme, 1952.
Reference is invited to Board's Circular F. No. 44/14/1964-ITJ dated the 22nd March, 1965, on the above subject.
2. I am directed to say that the Board has re-examined the contents of its circular referred to above. According to Section 2(38) of the Income-tax Act, 1961, the term 'recognised provident fund' means a provident fund which has been and continues to be recognised.by the Commissioner in accordance with the rules contained in Part A of the Fourth Schedule and includes a provident fund established under a scheme framed under the Employees' Provident Funds Act, 1952. It would thus appear that in order to avail of the benefits of the Income-tax Act, a provident fund has either to be recognised in accordance with the provisions of the Income-tax Act or it must be established under a scheme framed under the Employees' Provident Funds Act, 1952. The funds which are not established under the Employees' Provident Funds Scheme, 1952, have to be expressly recognised by the Commissioner under Rule 3 of Part A of the Fourth Schedule to the Income-tax Act, 1961, before they can be covered by the definition of Section 2(38) of the Act.
3. When a fund is exempted under Section 17 of the Employees' Provident Funds and Family Pension Fund Act, 1952, it is implicit that it is not established under the Employees' Provident Funds Scheme, 1952. It has, therefore, to be recognised by the Commissioner under the relevant provisions of the Income-tax Act, before it can enjoy benefits of a 'recognised provident fund' under the Act. In view thereof, Boards Circular No. 44/14/1964-ITJ dated 22nd March, 1965, is withdrawn with immediate effect." [1975] 98 ITR (St.) 37.
A plain reading of the aforesaid circular will show that nowhere it has been stated that a fund which has been established under the Employees' Provident Funds Scheme, 1952 and is covered by the definition of Section 2(38) will cease to be a recognised provident fund in the event of its getting exemption under Section 17 on a later date. All that it has been stated is that when a fund is exempted under Section 17, it becomes implicit that it is not established under the Employees' Provident Funds Scheme, 1952. It has been found earlier that the assessee framed a provident fund scheme known as the West Bengal State Electricity Board Employees' Contributory Provident Fund Regulations, 1965 in accordance with the provisions of Section 5. The said Provident Fund Scheme and fund established in 1965 satisfy the conditions laid down in Section 2(38). It does not stand to reason that such a fund would cease to continue to be a 'recognised provident fund' as and when it was granted exemption under Section 17. It has been also found that in terms of the State Government's notification dated 8-7-1971 the regulations of the provident funds drawn up in 1965 continued with certain modifications and the fund continued to remain under the administrative control of the Regional Provident Fund Commissioner. We are, accordingly, satisfied that the Board's Circular dated 30-11-1974 is not applicable in the assessee's case and even if it was applicable the provident fund of the assessee-company established in 1965 cannot be held to be a fund that did not come within the definition of Section 2(55). In our opinion, the Commissioner was wrong in holding that the assessee's provident fund was not a recognised provident fund within the meaning of Section 2(38). We, accordingly, set aside the Commissioner's order under Section 263 and restore the order of the ITO for the assessment year 1976-77.
6. Since we have set aside the Commissioner's order, it is not necessary to deal with the alternative arguments advanced by the assessee's learned counsel, viz., that the contributions made by the assessee towards the employees' provident fund should be allowed as a deduction under Section 37.